Profit from properties that meet the qualifying tests for furnished holiday lettings are taxed following the rental business calculation rules. If material services are provided (akin to a hotel) then it is a trade and will be treated as self employment not Furnished Holiday Lettings.
Whilst they are not actually trades, Furnished Holiday Lettings are treated as trades for some tax purposes and therefore have some tax advantages over other lettings. The advantages under the special rules are:
• Capital allowances on furniture, furnishings, etc.
• Capital Gains Tax reliefs for traders
• Profits count as earnings for pension purposes
The profit or loss from furnished holiday lettings need to be worked out for each year ending on 5th April and separately from any other rental property to ensure that the special advantages are restricted to the furnished holiday lettings that meet the qualifying tests below.
To qualify as a furnished holiday letting the accommodation must be in the UK or European Economic Area and commercially let. All the properties you own in the UK are taxed as one Furnished Holiday Letting business and all the properties you own in other EEA states are taxed as a separate business. Separate records will need to be kept for each business.
‘Commercial’ means let on a commercial basis and with a view to making a profit. Close season lettings may produce no profit but normally help towards the cost of maintaining the property. This letting can still be treated as commercial. On the other hand, lettings to friends or relatives at zero or nominal rents are not commercial.
Accommodation is ‘furnished’ if the visitor is entitled to the use of furniture. There should be sufficient furniture provided for normal occupation.
If the accommodation meets these criteria, the property will then need to pass the following qualifying tests.
All three of the following tests must be satisfied if a letting is to qualify:
1. The availability condition - during the period (normally the tax year), the accommodation is available for commercial letting as holiday accommodation to the public for at least 210 days. A property that is owner-occupied for part of the year cannot be treated as available for letting while it is owner-occupied. However, an owner can move out of their home during the holiday season and return to live there when the season is over.
2. The letting condition - during the period the accommodation is commercially let as holiday accommodation to the public for at least 105 days. There is an averaging election (if more than one FHL is owned) or a period of grace election which may help if this condition is not met every year.
3. The pattern of occupation condition - the accommodation must not be let for periods of longer-term occupation (normally 31 days or more) for more than 155 days during the year.
Property closed for part of the year or part only of property let
Where a property is kept solely for letting as furnished holiday accommodation, but is in fact closed for part of the year because there are no customers, you can deduct the whole of expenses such as insurance, interest, etc. provided there is no private use.
Where only part of a property is let as furnished holiday accommodation, receipts and expenditure should be apportioned on a reasonable basis. It will be necessary to apply a similar apportionment when you dispose of the property for the purposes of CGT reliefs.
Furnished Holiday Letting businesses are entitled to capital allowances on the furniture, white goods, etc. within the property but non Furnished Holiday Letting businesses do not qualify for these CAs. If there is private use of an asset, an appropriate adjustment must be made.
There are no capital allowances for the cost of the property itself or the land on which it stands.
Capital Gains Tax
The following may be available where the property qualifies as a Furnished Holiday Letting.
• Entrepreneurs’ Relief
• Business Asset Rollover Relief
• Relief for gifts and similar transactions
Furnished Holiday Lettings profits count as relevant UK earnings for pension purposes. Pension contributions (including employer’s contributions) can be made of up to the lower of total relevant earnings or £40,000 (unless income is in excess of £110,000 or pension benefits have already been drawn in which case there may be a further restriction on the amount which can be paid). There are rules for using unused allowances from previous years.
A recent case (HMRC v Nicolette Vivian Pawson) has been lost by the taxpayer when Business Property Relief was claimed on a standard holiday letting. For Business Property Relief to be available, more services need to be provided so that it is more like the provision of hotel services rather than just a furnished holiday let. Otherwise the value of the property will be included in the estate for Inheritance Tax purposes.
A supply of holiday accommodation by a registered VAT trader will generally carry VAT at the standard rate whether or not it is holiday accommodation that meets the qualifying Furnished Holiday Letting tests but this may not be the case for off-season letting.
Class 4 National Insurance contributions
Since the profit is taxable as rental income Class 4 National Insurance is not payable.
If you make a loss in your UK Furnished Holiday Letting business, it can only be carried forward against a profit of the same UK Furnished Holiday Letting business. Likewise a loss in an EEA Furnished Holiday Letting business can only be carried forward against the profits of the same EEA Furnished Holiday Letting business.
Since 6th April 2011, the losses of a Furnished Holiday Letting business can’t be set against the profits of a Non Furnished Holiday Letting rental business or any other income.
What happens when a property stops being a Furnished Holiday Letting?
Income and expenditure from a property that no longer qualifies as an Furnished Holiday Letting becomes UK or non UK property income. It will be added together with any other Non Furnished Holiday Letting property income.
Any losses would usually lapse but there are special rules if there is a temporary gap.
© Thandi Nicholls Ltd 2018 All Rights Reserved - The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, K Nicholls FCA or S Thandi cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
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